We have turned neutral on EUR/USD as a stabilization in Eurozone growth is offset by political uncertainty in Italy. The path to Brexit is volatile, but we think the expected soft result should lift the undervalued GBP eventually.

We remain positive on EM FX as fundamental valuations have improved further and the growth environment in emerging markets remains robust.

EUR/USD has recovered from the lows hit during the recent Turkey-related market jitters, but it remains volatile and faces two-way risks in the months ahead. Economic surprises in the Eurozone are more positive again than in the USA, which could support the EUR. Yet the upcoming budget process in Italy is a key event risk. It may delay the catch-up of European interest rate expectations with US interest rate expectations, putting into question a key assumption of our formerly positive view on EUR/USD. In addition, technical analysis signals downside risks for the currency pair if it were to break below the key 1.15/1.145 support area again. Hence, we take a less directional view over 3–6 months. We have revised our EUR/USD 3M and 12M forecasts to 1.16 and 1.21 (down from 1.21 and 1.27), respectively. In the longer term, we remain convinced that the USD will resume its depreciation trend as the US twin deficits are a burden and USD valuations remain on the expensive side.

Appreciation risks for CHF Emerging market (EM) turbulence, trade fears and uncertainty in Italy continue to pose appreciation risks for the CHF. Yet the improving Eurozone growth picture is expected to stabilize EUR/CHF mid-term. Unlike the CHF, the JPY has failed to benefit from the cautious market environment lately. Japan’sexposure to a possible escalation of global trade tensions will remain a burden for the JPY unless risk aversion spills over to US asset markets.

GBP: Volatile, but expected to eventually recover the GBP is likely to remain volatile as Brexit-related events such as the conference of the UK Conservative Party at the end of September and the EU Council meeting in mid-October take center stage. In the medium term, we expect the significantly undervalued GBP to rebound as we see a soft Brexit as more likely than the UK leaving the EU without a deal.

Remain positive on EM FX despite volatility we remain positive on the EM FX Index despite renewed market pressure in recent weeks, as fundamental valuations have improved to a point only seen during major crises. The still favorable EM growth environment reinforces our belief that the recent selloff should reverse in coming quarters as country-specific factors gradually wane. Positive growth differentials and higher real rates relative to developed markets, as well as more hawkish EM central banks should ultimately support EM FX. Large external imbalances in some countries are starting to improve significantly following the market sell-off, and high FX reserves adequacy ratios provide a cushion against external shocks. In the Europe, Middle East and Africa region, we remain positive on the ZAR given its extremely cheap fundamental valuation. Although economic activity is still weak, high frequency indicators suggest that it seems to be bottoming. In Asia, we have changed our positive call on the SGD to neutral, while remaining negative on the PHP. We expect the CNY to trade in a range as growth concerns are mitigated by policy support. Nevertheless, we are monitoring the trade risks closely.